Union Petroleum Minister Dharmendra Pradhan has asked RAW, the country’s premier foreign intelligence agency, to investigate an alleged “link” between the lawyers for Reliance Industries Limited (RIL) and the umpire in the arbitration tribunal that’s adjudicating since 2011 in a dispute over costs related to Panna, Mukta and Tapti (PMT) oil and gas fields.

On one side of the dispute is the government, arrayed on the other side are RIL and British Gas (BG). RIL and BG hold 30 per cent each — state-run Oil & Natural Gas Corp (ONGC) holds 40 per cent interest — in the PMT fields.

Pradhan has also ordered “exploring the possibility of handing over case to Serious Fraud Investigation Office (SFIO) on the issue of notional income tax” where the government maintains that RIL-BG are claiming a higher income tax deduction than what they pay.

These decisions on a RAW and SFIO probe were taken at a meeting mid-November between Pradhan, Petroleum Secretary Saurabh Chandra, and the government’s senior advocate Indu Malhotra.

Malhotra, according to records accessed by The Indian Express, is the one who red-flagged the alleged conflict of interest. She told Pradhan of her “suspicion that the Presiding Arbitrator (Christopher Lau) still has continuing connection with Allen & Overy (solicitor firm for RIL and BG in the arbitration)”.

When arbitration began in 2011, Lau, a Singapore-based lawyer, had declared to both sides — the then UPA government and RIL-BG — that his daughter had worked for Allen & Overy.

Malhotra also informed Pradhan of Reddy’s “specific concerns about the conduct of the Presiding Arbitrator (Lau) and his attitude against the government”.

At a meeting in October 2014, Malhotra said, Reddy told her “he also suspected some links between Allen & Overy and Christopher Lau”.

Reddy resigned from the tribunal on February 4, 2014 saying that “the atmosphere of the arbitration proceedings was not conducive to the collegiate and collective functioning of the Tribunal”. He also cited failing health and prolonged arbitral proceedings as reason for his exit.

Reddy, who was selected in 2011 from a panel sent to the Law Ministry by then Petroleum Minister S Jaipal Reddy, recommended Justice B Sudarshan Reddy as his replacement. The latter was appointed on March 14, 2014.

In her meeting with Pradhan, Malhotra sought an investigation into the conduct of arbitrators based on inputs she had received. “Accordingly, a secret note was sent to Secretary (RAW) to look into alleged linkage between Allen & Overy and Christopher Lau,” says a government note.

Subsequently, Pradhan, on November 25, endorsed his ministry’s proposal to “challenge the neutrality of presiding arbitrator in the case in the Permanent Court of Arbitration (the final court of appeal in international arbitration cases), The Hague, in case some inputs are received from RAW”.

The UPA had previously challenged the RIL-BG-appointed arbitrator Peter Leaver’s mandate in the PCA saying his conduct was partial and biased against Indian government. However, PCA rejected the challenge in June 2013.

“In view of the biases of the tribunal and considering that a fair trial may not be forthcoming in this case”, Pradhan has also approved filing a curative petition in the Supreme Court to “bring back the jurisdiction of Indian Courts in the matter”.

The Supreme Court last May ruled that the government’s challenge to a Tribunal order could be made only in English courts as the seat of arbitration was in London and that Indian courts would not have jurisdiction over it.

Two months later, it dismissed a review petition filed by the government against its May order.

Pradhan also approved on November 25 that an attempt be made to protect government interest by “exploring the possibility of handing over case to SFIO on the issue of Notional Income Tax (NIT)”. The reason for that is that his Ministry says the operators used notional income tax of 50 percent as deduction from their cash flows even though they actually paid 33.99 percent to the Income tax Department.

It claims that government share of profit petroleum was “adversely affected” by $443 million due to the use of wrong income tax rate.

It says that this, effectively, raised the contractor’s share of profit. The contractors, it told Prime Minister’s Office, earned $11.05 billion (BG and RIL $3.32 billion each and ONGC $4.42 billion) while the government got $1.3 billion.

“The contractors have used the clause related to notional income tax in the production sharing contract in a manner so as to benefit themselves unjustly,” the ministry wrote to the PMO on December 2.

No comments received

The Indian Express sent email questionnaires to RIL, British Gas, Allen & Overy and Justice Christopher Lau on January 15 asking for comments on the government’s suspicion of an alleged nexus between Lau and Allen & Overy. No response was received.

The Indian Express called up Justice Jeevan Reddy who had raised concerns over the judge. Justice Reddy declined to comment saying: “I do not speak to the press.”

What the arbitration is about

Arbitration is a dispute resolution procedure in which a disagreement is submitted to one or more arbitrators who make a binding decision. If the contestants opt for a three-member tribunal, each party appoints one arbitrator and the two arbitrators then agree on a presiding arbitrator to act as an umpire to guarantee stronger independence and impartiality.

Reliance and British Gas in December 2010 went into arbitration seeking an increase in field operation costs that they could deduct from sale of oil and gas as expenses before declaring the profit to be shared with the government. The cost recovery is fixed in the contract at $545 million in Tapti gas field and $577.5 million in Panna-Mukta oil and gas field. Reliance and BG are demanding that cost provision be raised by $365 million in Tapti and $62.5 million in Panna-Mukta.

Their other contentions are increase in royalty payable to the government as well as cess and service tax and the scope of audit by the government’s Comptroller & Auditor General.

Government’s counter claim includes loss of $443 million profit due to using wrong income tax rate in computing government’s profit petroleum and production loss of $5.7 billion due to non-completion of committed development.

In September 2012, the tribunal had ruled that it did have jurisdiction to adjudicate on issues of royalty, cess and CAG audit and directed the Govt to reimburse $11.4 million to the RIL-BG combine.

In December 2012, the tribunal ruled that the cost incurred by RIL-BG for production facilities is recoverable.